Chapter 5- life insurance underwriting & policy issue Flashcards
Adverse Selection
the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.
is the date halfway between birthdays when the applicant’s age changes to the next higher age. With some insurers, the age is based upon the applicant’s age at his nearest birthday. In others, it is based upon the age of his last birthday.
Age change
The applicant
is the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case
The application
is the Statement of information given when a person applies for life, health, or disability insurance. The insurance company’s underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company’s guidelines.
- Applications are attached to and made a part of all individual contracts.
Attending Physician Statement (APS)
these are used when the application or medical examiner’s report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter.
Backdating
the practice of making the effective date of a policy earlier than the application date.
- used to make the issue age lower than an applicant’s real age in order to get a lower premium.
- State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment.
Binding Receipt (Unconditional Receipt)
It is one of the types of receipts given by an insurance company upon the completion of an insurance application if the initial premium is collected with the application.
- Insurance becomes effective on the receipt date and continues for a specified period of time or until the insurer declines the application.
A pamphlet that describes and compares various forms of life or health insurance.
- must be provided to a consumer by the producer when the latter is attempting to solicit insurance
- makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage.
Buyer’s Guide
Conditional Receipt
a form customarily required to be signed by the agent and given to the prospective owner at the time a new application is completed.
- Most require that the agent collect an initial premium and, in turn, grant some level of limited coverage under special conditions before issuing the policy.
- Without a valid conditional receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid.
a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant’s character, reputation, lifestyle, etc.
- Insurers can conduct to obtain additional information as long there is no invasion of privacy present.
- A common type involves a credit report.
Consumer Report (Investigative Consumer Report)
Credit Report
a summary of an insurance applicant’s credit history (credit score, debt levels, repayment history, and assumed creditworthiness, etc.), made by an independent organization that has investigated the applicant’s credit standing.
Credit reports are typically obtained from one of the three major credit bureaus
Experian, Equifax, and TransUnion
Declined risk describes an individual
whose application for coverage was rejected by an insurance company.
a disclosure form is a
comparison form required by various state regulatory agencies to be given to every policy owner when replacing an existing policy with another.
Evidence of Insurability
a statement or proof of a person’s health history and current health status that qualifies that person for coverage.
The Fair Credit Reporting Act
a federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage.
- This law permits an insurer to conduct a consumer report on applicants and proposed insureds.
- An applicant for insurance must be informed of the purpose of the report and has the right to receive a copy
Suppose coverage is declined due to information in the report. In that case, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.
The field underwriter
is the agent or producer completing the applicant’s application for insurance.
Inspection report
a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.
Insurable interest
describes the financial or emotional relationship between two or more parties justifying one owning a life insurance policy on the other.
- People are said to have an unlimited insurable interest in their own life.
- may exist in another person’s life if there is a chance of a financial or emotional loss at that person’s death.
- must exist at the time of policy issue.
The Medical Information Bureau
a service organization that collects medical data on life and health insurance applicants for member insurance companies.
- detects misrepresentations, helps identify fraudulent info
- information released to MIB about a proposed insured may be released to the proposed insured’s physician
Policy Summary
summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities.
describes an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age.
Preferred risk
The proposed insured
is the person whose life is requested to be insured. Typically, but not always, this is also the applicant.
Rated policy (rating up)
the basis for an additional charge to the standard premium because the person insured is classified as a higher-than-average risk. The above standard rates usually result from impaired health or hazardous occupations.
Replacement
a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one.
- Producers must provide a “Notice Regarding Replacement” to the consumer when this activity may occur.
Most State laws specify that the applicant’s statements on the application are considered ____ and not warranties
representations
describes the underwriting category into which risk is placed depending upon the applicant’s susceptibility to injury, illness, or death.
Risk Classification
Special class
describes an applicant who cannot qualify for a standard policy, but may secure one with a rider waiving the payment for a loss involving certain existing health impairments.
- They may be required to pay a higher premium or to accept a policy of a type other than the one for which he has applied.
Standard risk
describes a person who, according to a company’s underwriting standards, is considered an average risk and insurable at standard rates.
- High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.
Substandard risk (impaired risk)
describes an applicant whose physical condition does not meet the usual minimum standards.
- If due to adverse health, the application may be declined or written with a “rated-up” premium.
- An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).
An underwriter
is a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.
the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined.
Underwriting
A ___ must be absolutely and literally true. A breach of… may be sufficient to void the policy whether or not the …. is material and whether or not such breach of …. had contributed to the loss.
warranty
Part I: General Applicant Information (age, DOB, Sex, address, marital status, occupation)
- type of policy
- amount of insurance
- name and relationship of the beneficiary
- other insurance the proposed insured owns
Part II: Medical and Health History
- focuses on the proposed insured’s health and asks several questions about the health history, not only of the proposed insured but of the proposed insured’s family, too
Part III: The Agent’s Report or Statement
- agent’s report statement
- applicant’s financial condition, background, purpose of sale, etc.
- The agent provides additional information about the applicant’s financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant.
USA Patriot Act
- enacted in 2001
- requires insurance companies to establish formal anti-money laundering programs
- purpose of the act is to detect and deter terrorism
substandard - ___ risk - ___ ___- ___ premiums
high; rated up; higher
declined- not insurable -
potential of loss to insurance company is too high
temporary insurance agreement
similar to the binding receipt, this type extends coverage immediately
- if the insured dies during the underwriting period, the claim will be paid
the effective date is important for 2 reasons:
- identifies when the coverage is effective
- establishes the date by which future annual premiums must be paid
constructive delivery
policy delivery may be accomplished without physically delivering the policy into the policy owner’s possession
- mailing the policy to the agent
If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no ____ ____
constructive delivery
personal delivery
- allows the producer to explain the coverage to the insured (such as the riders, provisions, and options)
- builds trust and reinforces the need for the coverage
Acts that can be considered means of delivery: (3)
- mailing policy to the agent
- mailing the policy to the applicant
- the agent personally delivers the policy
